EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The Energy Tax Aspects of New Jersey Warehouses

Throughout New Jersey warehouse owners are moving quickly to make the
building energy reducing investments the need to make for business reasons
while qualifying for substantial Federal and New Jersey tax savings. New Jersey
warehouses owners need to make a series of building improvements in order to
remain competitive attract tenants and retain building value. It is important
for the warehouse owners making these investments to optimize a series of
important tax benefits that are in certain cases only available for a limited
time period.

The 750 million square feet of warehouse space places the state third in the
nation behind Los Angeles and Chicago, according to James W. Hughes, dean of
the Edward J. Bloustein School of Planning at Rutgers University in New
Brunswick. The three main warehouse sub regions are: 1. The Meadowlands, 2. The
Port area, and 3. The Turnpike 8A, 8, 7A and 7 area. The Meadowlands is
generally focused on serving the New York metropolitan area, and the Central
New Jersey turnpike exit locations play a dominant role in servicing
distribution throughout a multi state region.

The EPAct Tax Opportunities

Pursuant to Energy Policy Act (EPAct) Section 179D, warehouses making
qualifying energy-reducing investments in their new or existing locations can
obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn't qualify for the maximum EPAct $1.80 per
square foot immediate tax deduction, there are tax deductions of up to $0.60
per square foot for each of the three major building subsystems: lighting, HVAC
(heating, ventilating, and air conditioning), and the building envelope. The
building envelope is every item on the building’s exterior perimeter that
touches the outside world including roof, walls, insulation, doors, windows and
foundation.

Warehouses that combine energy-efficient lighting and heating have become,
by far, the largest category of buildings qualifying for the $1.20 to $1.80
EPAct tax deductions. The following table illustrates the magnitude of
potential EPAct tax benefits available at various square footages:

Alternative Energy Tax Credits and Grants

There are multiple 30% or 10% tax credits available for a variety of
alternative energy measures with varying credit termination dates. For example,
the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power
tax credit also expires January 1st 2017. The 30% closed loop and open loop
biomass credit expires January 1st, 2014.

All alternative measures that are eligible for the 30% and 10% tax credits
are also eligible for equivalent cash grants for the three years staring
January 1st 2009 and ending December 31st 2011.

Lighting

Building lighting comprises a large portion of warehouse energy use. Most
warehouses that have not had a lighting upgrade to energy efficient lighting in
the last 7 or 8 years utilize prior generation metal halide or T-12 fluorescent
lighting. It is also important to realize that effective January 1, 2009 most
probe-start metal halide lighting may no longer be manufactured or imported
into the United States and effective July 1, 2010; most T-12 lighting may no
longer be manufactured or imported into the United States. This means that
warehouses that still have this lighting technology will soon be subject to
large price increases for replacement lamps and bulbs.

This prior generation T12 and metal halide lighting is very energy
inefficient compared to today's T-8 and T-5 lighting, and a lighting retrofit
can easily reduce lighting electricity costs by 40 to 60 percent. In addition
to large energy cost reduction from the base building lighting, most warehouses
undergoing lighting retrofits install sensors that completely shut off the
lighting in portions of the warehouse that are not in use. Previously, many
warehouse owners and lighting specifiers were reluctant to install sensors
because they reduced fluorescent lamp useful life. Today, improved technology
sensors are available with warrantees not to reduce lamp useful life.

Heating

New, improved commercial heating systems can provide energy cost savings of
eight percent or more over the ASHRAE 2001 building code standards. There are
multiple heater technologies suitable for the warehouse market, including
direct fired gas heaters, unit heaters, and infrared (radiant)
heaters1.

If feasible the warehouse heater should be mounted on an exterior wall to
optimize the roof top solar P.V. space.

An example illustrating the maximum utilization of the $1.20 EPAct tax
deduction for a 100,000 sq ft warehouse with an energy efficient heater is as
follows:

100,000 sq ft Warehouse

$1.20 per sq ft EPAct Tax Deduction

With this example, the $120,000 (100,000 sq ft x $1.20) entire investment
EPAct tax deduction will be achieved as long as the combined lighting heater
project reduces total energy cost by 33 1/3% as compared to ASHRAE 2001.

Building Envelope

If a warehouse requires reroofing this owner should consider a more energy
efficient white roof. Moreover, when reroofing this is the ideal time to
consider adding more insulation. If the building already had an energy
efficient design and roof the owner may want to consider upgrading to more
energy efficient truck bay doors and windows.

100,000 sq ft Warehouse

$1.80 per sq ft EPAct Tax Deduction

With this example the maximum $180,000 EPAct tax deduction (100,000 sq ft x
$1.80) will be available as long as the combined lighting, heater and roof
project reduces total energy cost by at least 50% as compared to ASHRAE
2001.

Solar P.V.

Solar P.V. rooftop systems are used to generate electricity at warehouses.
Warehouses typically make ideal solar installation candidates since they often
have large, unobstructed flat roofs. Large roofs enable large P.V. systems that
generate more electricity. Solar P.V. installations are entitled to 30% tax
credit or now for the first time a 30% grant2. When using either the
credit or the grant, normally five year MACRS tax deprecation is available. For
the period September 9 through December 31st, 2011 100% bonus tax depreciation
is available. For 2010, 50% bonus depreciation is available. Often tax equity
partners will be willing to make the investment for a rooftop warehouse solar
installation and enter into a power purchase agreement where the warehouse
operator post-installation will purchase its electricity at an agreed price for
a fixed period of time, usually 15 to 20 years. The tax equity partner will use
a combination of the power purchase agreement annual revenue, the tax credit or
grant, utility rebates if available, green tag emission payments (called
renewable energy certificates or REC’s in New Jersey) and net metering
electricity payments for selling the excess power back to the grid to generate
an acceptable economic return. With a power purchase agreement, a warehouse is
essentially renting its roof as an alternate energy electrical generator.

Determine utility rebate based on all proposed separate and combined
measures. Lighting will reduce electrical use. Roof, insulation and heater
will reduce therms.

Determine tax incentives including EPAct tax deduction benefit and solar
credit tax deductions. EPAct will be based on total project square footage,
including mezzanines and pick and pack modules. The 30% solar tax credit
will be based on the combined solar material and installation costs.

Reduce Federal and State estimated tax payments for large tax deductions
and credits.

Celebrate tax enhanced energy efficient warehouse achievement.

Conclusion

As described above there are multiple compelling reasons including energy
and substantial tax savings why New Jersey warehouses are becoming the breakout
energy efficiency project building category. This is such a widespread
phenomenon that market forces will require warehouse landlords to upgrade just
to remain competitive. Once the overwhelming majority of warehouses are
upgraded America's building products community will undoubtedly turn their
attention to the next major building category requiring improvement which may
very well be the office building you are sitting in.